What Is Buy Now, Pay Later?

“Buy now, pay later” is the ability to pay installments on a purchase you’re about to make, usually online. Typically, an outside company is the one extending the offer. Say you’re going to buy the Peloton bike you hope you use more than once a month. If you opt to pay for it in installments, you’re financing your purchase through a third-party company called Affirm, and not Peloton itself.

Even credit card companies have gotten on board, offering cardholders an opportunity to make installment payments on purchases over a certain dollar amount. These options usually come with a set fee and lower interest rate than the card would normally offer.

These arrangements can be advantageous to both sellers and buyers. The ability to make multiple payments over time can make a purchase seem more appealing to shoppers and result in more sales for the vendors. But using a BNPL offer may not always be a wise move, especially if it encourages spending more than you can afford.

Using a buy now, pay later (BNPL) option to spread out payments on a big buy resembles a personal loan, in that your payments are split into equal installments over a period of time. These loans are often interest-free as long you make your payments on time and in full. This differs from a traditional credit card purchase, which charges you interest for every month you carry a balance, unless you’re approved for a card with an introductory 0% APR offer on purchases.

Advantages of BNPL

• Ability to split up your payments. This might make an expensive item more attainable since you don’t have to pony up a lump sum or pay interest.
• There’s no hard credit pull. Unlike applying for a new credit card, BNPLs are easier to qualify for and do not require a hard inquiry. This means that someone who is new to credit or doesn’t have a strong credit profile might find it more appealing to make a purchase this way.
• Simple to do. Online shoppers in particular may find the immediate gratification of buying what they want in easy-to-understand terms a preferable way to shop.
• Can help manage cash flow. A BNPL can help someone buy what they need with a payment plan that fits their budget.

Disadvantages of BNPL

There are some potential pitfalls to be aware of with this type of financing offer.

• Terms may vary. Before committing to a BNPL loan it’s important to understand the terms of the deal. Different BNPL companies have different interest rates, late payment fees or could have other fees you aren’t aware of.
• Some come with fixed fees. These types of programs add a fixed fee to your monthly payments, which can cost you extra over the life of the loan vs. buying the item outright.
• May encourage overspending and debt. The ability to pay off an item over time can make a purchase seem more affordable. Multiple BNPL loans can also keep you in a cycle of debt.
• You may still face bank fees. By signing on for multiple additional payments, it’s easy to lose track of when payments are due. If your automatic withdrawal falls on a day when your bank account is low, you may face insufficient funds fees from your bank.

Generally, there are two types of BNPL loans:

• No-interest loans. With these types of loans, the merchant pays a fee to the third-party lending company rather than the consumer paying interest on the loan.
• Loans with interest. These loans enable the consumer to make the purchase in the moment, but charge interest, plus they may involve additional fees.

Typically both types of loans extend credit for a set time period. For example, if the item you’re interested in offers you a no-interest, four-part installment plan on a $1,000 purchase, you’ll typically make four equal payments of $250 every two weeks following the initial payment. If you don’t make the payments in full each month, you may be subject to penalties and other charges. And, if the BNPL came with a 0% interest offer and you’re late or skip a payment, you may be subject to deferred interest charges, which will retroactively apply to the entire balance.

Differences Between Third-Party and Credit Card BNPL Offers

The versions of BNPL offered by credit card companies differ slightly from third-party point-of-sale financing. For one thing, they aren’t offered before you’re making the purchase. But they will appear as an option on qualifying purchases on your statement. And, these plans do carry a monthly payment fee, added into your installment plan. Many credit card installment plans still charge interest, just at a lower rate than the regular purchase interest rate on your card.

Some may find these offers even more convenient than a third-party company loan since it only requires you to decide after you’ve made the purchase if you want to split up payments using a line of credit you already have. This will ensure all your payments go to the same creditor and extends the payment plan to three months instead of six weeks. And, if you use a rewards credit card to make the purchase, you’ll also earn points.

Affirm

Affirm has partnered with many well-known brands, such as Apple, Hudson’s Bay, Structube, and Peloton. They have some offers that are as good as 0% interest offer for as long as 12 months. However, the offers depend on the retailer and your creditworthiness. Rates range from 0% to 32% APR (these are subject to provincial regulatory limitations). There are no late fees, prepayment fees or deferred interest charges.

Afterpay

Afterpay is available in many major stores, such as IKEA, Pandora and Ray-Ban. To use it, you choose Afterpay at checkout with one of the partner stores. First-time users have to create an account (with instant approval), while returning users have to log in. Then, you can split your purchase into four equal interest-fee payments. You will have to pay for the first installment (25% of the total cost) at the time of purchase, and the remaining three installments will be automatically deducted from your selected payment card over the next six weeks.

Klarna

Klarna is partnered with Nike, Sephora, Wayfair and other large retailers. They offer an interest-free “Pay in 4” plan, allowing shoppers to split any purchase into four installments. If you are late by more than 10 days for one of your four payments, you’ll be charged a late fee.

Sezzle

Sezzle, which is partnered with Home Depot, Walmart, and Hotels.com, also offers a pay-in-four plan, with four payments spread out over six weeks. Both of these options have 0% interest as long as you pay on time.

Buy now, pay later plans can be an effective way to spread out the pain of a large purchase. But before you sign on the dotted line, be sure to take a good look at the fine print and understand all the costs involved. If you can stay on top of your payments, reputable BNPL services are a great way to avoid interest. But make sure you can pay off the loan on time to avoid interest charges and late fees.